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number cruncher

What are we looking for?

Following the Number Cruncher we did two weeks ago for the U.S. market, today we focus on the most pricey stocks of the S&P/TSX composite index. Our goal is to determine whether the hefty premiums carried by these stocks are justifiable or not by looking at their economic performance and growth.

The screen

We screened the S&P/TSX with the following criteria:

To find the most overvalued stocks, we kept the 11 companies with the highest future-growth-value-to-market-value ratio – FGV/MV represents, as a percentage, the portion of market value that exceeds the company's current operating value. The higher the number, the higher the baked-in premium for expected growth and the higher the risk. A negative number reflects a discount. For example, a future growth value of minus 50 per cent means the market value would need to increase by 50 per cent to equal what the company is worth if its operating profit stays flat forever. To analyze the stocks, we added the following metrics to our table:

  • The economic performance index, or EPI (return on capital divided by cost of capital). An EPI ratio of one or more indicates a company’s capacity to create wealth for its shareholders (a higher EPI displays a greater rate of wealth creation). A number lower than one means the company is destroying shareholders’ wealth;
  • The return on capital and 12-month return on capital change;
  • The one-year sales change;
  • The free-cash-flow-to-capital ratio. This ratio gives a sense of how well the company uses the invested capital to generate free cash flows, which could be used to stimulate growth, pay and/or increase dividends, reduce debt, etc. A positive figure is good, 5 per cent and above is excellent.

The stock price and dividend yield are displayed for informational purposes.

More about StockPointer

StockPointer is a fundamental analysis tool based on an EVA (economic value-added) model to quickly and easily identify investment opportunities. In addition to providing detailed reports on more than 7,500 companies (Canadian stocks, U.S. stocks and American depositary receipts), StockPointer also allows investors to create personalized filters and build custom portfolios.

What did we find?

Out of these 11 very pricey companies, only two (Kinaxis and Computer Modelling Group) are economically profitable with EPIs above one.

Aphria, who announced a deal early on Monday to buy the medical cannabis firm Nuuvera Inc., is the third most overvalued stock of the S&P/TSX, just ahead of its competitor Canopy Growth. Aphria generates a negative return on capital and it has gotten worse in the past 12 months. The company is the second-highest cash burner of the group; it runs through the equivalent of 37 per cent of its invested capital a year. With that kind of burn rate, we can expect the outstanding debt and number of shares to increase, otherwise the company will face liquidity issues. Thanks to the "marijuana bubble," Aphria's stock has gone up by 210 per cent over the past year, but is already down more than 20 per cent from its 52-week high on Jan. 9.

Shopify, the cloud-based e-commerce platform provider, wins the contest of the highest imbedded premium of the S&P/TSX with 96 per cent. This number means if you bought the stock at its recent price around $159, you bought about $152 (96 per cent times $159) worth of premium for growth expectations, and $7 worth of actual value. Let's hope the sales growth of 75 per cent that Shopify generated in the past 12 months will stay for a couple more years, otherwise the stock might face a serious price readjustment.

Investors are advised to do additional research prior to investing in any of the companies mentioned.

Jean-Didier Lapointe is a financial analyst at Inovestor Inc.

S&P/TSX stocks carrying hefty share price premiums

CompanyTickerMarket Cap. ($Mil)EPIFGV on MVROCROC 12M Chg.Sales 12M Chg.FCF/CapitalDiv. Yield Recent Price
Shopify Inc.SHOP-T15,770-0.196%-0.7%1%75%-4%-$159.07
Bombardier Inc. BBD.B-T7,9600.192%0.5%1%-7%-6%-$3.54
Aphria Inc.APH-T3,230-0.191%-1.2%-5%69%-37%-$20.16
Canopy Growth Corp.WEED-T6,730-0.691%-8.9%23%141%-14%-$35.09
Osisko Gold Royalties Ltd.OR-T2,2200.390%2.1%-1%89%-3%1.41%$14.14
Nexgen Energy Ltd.NXE-T973-1.089%-13.5%-2% N/A-8%-$2.87
Kinaxis Inc.KXS-T2,1701.388%12.7%3%16%22%-$85.44
Prometic Life Sciences Inc.PLI-T1,250-1.682%-22.4%-1%39%-41%-$1.76
Vermilion Energy Inc.VET-T5,9700.279%2.2%7%22%1%5.26%$49.08
Computer Modelling Group Ltd.CMG-T7902.276%26.4%1%0.04%-25%4.07%$9.84
Mag Silver Corp.MAG-T1,210-0.773%-10.1%-3% N/A-2%-$14.12